Professional Documents
Culture Documents
Aurlie Bros
October 2015
Russia/NIS Center
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Author
Aurlie
Bros
is
a
Doctor
of
Geopolitics/Geography. She studied at the Paris I
Panthon-Sorbonne and at the Russian
Academy of Sciences in Moscow. During the
three years of her PhD thesis, she worked
successively for private companies, European
institutions
(e.g.
European
Commission),
ministries and research centers throughout
Europe, including the Energy Research Institute
of the Russian Academy of Sciences (ERI RAS).
She is currently a researcher and assistant
professor at the Energy Institutes in the Higher
School of Economics in Moscow and in the ERIRAS, and an associate researcher at the
Russia/NIS Center, Ifri.
Latest publications
The European Union and Russia: Between Pride and Bias, Revue
Analytique Financire, April 2015.
Gazprom in Europe. A Business
Russie.Nei.Reports, No. 18, Paris, July 2014.
Doomed
to
Fail?
Executive Summary
The key role played by Ukraine in the transport of Russian gas and
the underground gas storage facilities are a legacy of the Soviet era.
The collapse of the USSR forced the Russian Federation to formulate
its own national energy strategy after the Soviet Republics and
satellite states went independent, to readjust it over time and to
define new relationships with these countries regarding the gas
sector. The collapse also had the effect of complicating gas transport
after 1991a reality that had never been a thorny issue before since
Ukraine had been formerly integrated into the territory of the Soviet
Union.
From the mid-1990s onwards, Gazprom has repeatedly tried
to control gas transit through Ukraine and other infrastructures from
the Soviet era. This effort has been double-pronged: the acquisition of
shares in the Ukrainian transit sector (100% owned by the Ukrainian
state) and the creation of a joint venture in order to exercise indirect
control over the network. Neither of these resulted in success. During
the 2000s, especially after the 2004 Orange Revolution, most of the
arguments between Ukraine and Russia were based on transit
contract, supply agreements, gas debts and management of the
transit network. Such a situation led Gazpromwith the support of
the Russian governmentto adopt a more assertive stance toward
Ukraine, i.e. cutting off gas flows intended for Ukraine. The two most
serious crises of this nature occurred in 2006 and 2009.
Gazprom developed major projects in collaboration with
European energy companies to diversify gas supply routes at a time
when it anticipated a major increase in European gas demand and
the import needs of Russian gas. The Nord Stream pipeline is
certainly the best illustration of Gazproms bypassing policy. From a
Russian perspective, transporting gas through the Nord Stream
pipeline is much more attractive than Ukraine as Gazprom thereby
avoids political tensions, keeps control of the situation and gets 51%
of the transportation profit for the same price.
In the context of the deepening Ukrainian-Russian crisis,
Alexander Medvedev, Gazproms deputy CEO, reaffirmed in June
2014 that the company will definitely cease gas transit though
Ukrainian territory at the end of 2019the expiration date of a 10year transit contract signed in winter 2009 when gas transit through
Ukraine was halted for a few weeks. Nevertheless, Alexei Miller,
Gazproms Deputy Chairman, officially rejected this target on the
26th of June. He said there was an order from President Vladimir Putin
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Contents
INTRODUCTION ................................................................................... 5
REDUCING TRANSIT THROUGH UKRAINE .............................................. 7
THE NORD STREAM PIPELINE ............................................................ 14
GAZPROMS INCREASING DISCOMFORT .............................................. 23
CONCLUSION .................................................................................... 33
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Introduction
The Russian Federation and the European Union (EU) have been at
loggerheads since the start of the Ukrainian crisis in November 2013.
This has damaged the EU-Russia Energy Dialogue,1 which has made
it difficult to address major bones of contention in the gas sector. The
tensions culminated in the cancellation of the South Stream project
on 1 December 2014 by the President of the Russian Federation and
its replacement with the Turkish Stream project.2 This has rekindled
the debate on Gazproms strategy of bypassing Ukrainian territory
the historic transit route of Russian gas toward Europeand, more
importantly, the future of EU-Russian gas cooperation.
Gas relations between Europe and Russia have been subject
to various multi-scalar and polymorphous changes since the 1990s,
swinging constantly between cooperation and tension. Three major
issues have influenced these changes. First, the collapse of the
USSR forced the Russian Federation to formulate its own national
energy strategy after the Soviet republics and satellite states went
independent, to readjust it over time, and to define new relationships
with these countries in relation to the gas sector. In a world where gas
is a commodity gaining increasing strategic significance, this resource
is used to provide Russia with greater economic security and
geopolitical power. A central issue was, and still is, the definition of
Gazproms status in Russian energy strategy and its closeness to the
Kremlin3. Secondly, the collapse of the Soviet Union had the effect of
The author is particularly grateful to Tatiana Mitrova, Head of the Oil and Gas
Department of the Energy Research Institute of the Russian Academy of Sciences;
Thierry Bros, Senior European Gas and LNG analyst at Socit Gnrale; MarcAntoine Eyl Mazzega, Russia Program Manager at the International Energy Agency,
and Ronald Farmer, Senior Gas Expert at E-Control Austria for their comments on
the final draft, which have enhanced the research quality of this paper.
1
Dialogue established in 2000 and providing the overall structure for energy
cooperation between the EU and Russia.
<https://ec.europa.eu/energy/en/topics/international-cooperation/russia>.
2
Initially, the South Stream project was intended to consist of four gas pipelines,
930km long, connecting Anapa in Russia to Varna in Bulgaria through the Black Sea,
and then Bulgaria to Baumgarten in Austria. The original transport capacity was
31 bcm/year before being extended to 63bcm/year after the Russian-Ukrainian gas
crisis of 2009. Gazprom confirmed the cancellation of the project on 9 December
2014. The Turkish Stream is composed of four pipelines with a capacity of
15.75 bcm/y each, i.e. a total of 63 bcm/y. The pipeline route is almost the same, with
the exception of the last 250km, which runs southwards to Turkey;
<www.gazprom.com/press/news/2015/january/article213570/>.
3
Gazprom is a state-controlled producer and supplier of natural gas, as well as
owner of the gas transmission system. Since its creation, Gazprom has always had a
key social role in Russia: delivering gas in Russia below cost until the early 2010s,
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employing people, supporting sporting and youth events, etc, while also fulfilling
3
Russias international obligations in gas supplies and optimizing its return on
investments thanks to gas exports, especially to Europe. Since 2006, the company
has held an export monopolyi.e. exports via pipelines and in liquefied form (LNG).
The monopoly on LNG exports was abolished in 2013.
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UGS allows seasonal swings in supplies. It is still one of the key elements of the
discussions between the EU, Russia and Ukraine.
5
Delivery points are located at the border. As there were only a few delivery points in
Europe, gas was often delivered at one delivery point for various consuming markets
on the border between West and East. This did not necessarily mean that buyers
paid the same price for gas.
6
K. Yafimava, The Transit Dimension of EU Energy Security: Russian gas transit
across Ukraine, Belarus, and Moldova, Oxford: Oxford Institute for Energy Studies,
2011.
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converting the rent into social subsidies in the USSR, exchanging the
rent for non-commercial concessions in satellite states (i.e. political
price of gas), and acquiring rent in a monetary form in Western
Europe. Gazprom tried to partly maintain such a division in the
aftermath of the breakup of the Soviet Union. The company was
obviously interested in stopping the sale of gas at a political price in
Eastern countries that had joined the EU or were about to join the EU.
However, from a Russian perspective, the transport dimension of the
SoS largely justified the maintenance of this form of rent in a few
former Soviet Union (FSU) states, such as Ukraine and Belarus two
transit countries consuming and importing high volumes of gas, with
weak economies and accustomed to buying gas at a lower price in
exchange for major political concessions. Accordingly, Gazprom
entered into the habit of negotiating gas prices in parallel with the
price of gas transit, and bargaining for relatively cheap gas in return
for relatively cheap transit.
Figure 1: Diagram of LTTCs in view of the localization of delivery points
Ibid. p. 390.
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assertive stance toward Ukraine, i.e. cutting off gas flows intended for
Ukraine. The two most serious crises of this nature occurred in 2006
and 2009.8
Disputes between Ukraine and Russia over natural gas started in the 1990s, but
were without major consequences for the EU. They did not result in interruptions or
shortfalls in gas supplies. All of the crises that occurred in the first part of the 1990s
were due to non-payments or late payments.
9
M. Martinez; M. Paletar; H. Hecking, The 2014 Ukrainian Crisis: Europes Increased
Security Position, Energiewirtschaftliches Institut an der Universitt zu Kln, 2015.
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Gazprom: Gas Transit Through Ukraine to End After 2019, Come What May,
Interfax-Ukraine,
9 June 2015,
<http://en.interfax.com.ua/news/economic/270971.html>.
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Russia Backs Down From Abandoning Gas Transit Through Ukraine, Reuters,
29 June 2015,
<www.reuters.com/article/2015/06/26/russia-gazprom-ukraineidUSL8N0ZC3AG20150626>.
12
For details, see A. Bros, Gazprom in Europe. A Business Doomed to Fail?, Ifri,
Russie.Nei.Reports, No 18, July 2014,
<www.ifri.org/fr/publications/enotes/russieneireports/gazprom-europe-businessdoomed-fail>.
13
This was adopted in July 2009 and became in law in March 2011. It includes a Gas
Directive and an Electricity Directive, which have to be transposed into national law,
and three regulations. Regarding the gas sector, Directive 2009/73/EC, Regulation
(EC) No 713/2009, and Regulation (EC) No 715/2009 are particularly significant.
They can be summarized into six main measures: the unbundling of networks, the
independence of national regulators, the effective functioning of the retail market and
consumer protection, the establishment of network codes, the development of longterm planning of trans-European energy networks, the creation of the Agency for the
Cooperation of Energy Regulators, and of the European Network of Transmission
System Operators for Gas.
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<www.government.nl/news/2014/01/17/natural-gas-production-reduced-and-fundsearmarked-for-groningen.html>.
No specific annual production caps have been set beyond 2016. However, the
production of the Groningen gas field is expected to decline naturally in any case.
15
International Energy Agency. Gas Medium-Term Market Report 2015, Paris, 2015.
16
The N-1 formula describes the ability of the technical capacity of the gas
infrastructure to satisfy total gas demand in the event of disruption of the single
largest gas supply infrastructure, during a day of exceptionally high gas demand
occurring with a statistical probability of once every 20 years. Regulation No
994/2010 concerning measures to safeguard security of gas supply.
17
T. Bros, After the US Shale Gas Revolution, Paris, Editions Technip, 2012, p. 165.
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The largest European gas consumers in 2014 were concentrated in this corridor:
Belgium: 14.7 bcm; France: 35.9 bcm; Germany: 70.9 bcm; Italy: 56.8 bcm;
Netherlands: 32.1 bcm; Turkey: 48.6 bcm; UK: 66.7 bcm.
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Figure 4: Routing the Nord Stream pipeline through the Baltic Sea
Source :
stream/>.
<www.gazprom.com/about/production/projects/pipelines/nord-
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T. Bros, After the US Shale Gas Revolution, Paris, Editions Technip, 2012, p.165.
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Source: <www.eegas.com/ns20091104e.htm>.
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The hydrocarbon sector is highly taxed in Russia, especially the oil sector, which is
the main revenue provider. Taxes in the oil and gas sector can be divided into three
major groups: the Mineral Extraction Tax (MET), the export tax and the corporate tax.
The MET (introduced in 2002) is one of the main tax burdens on Russian oil and gas
companies. It siphons a significant part of the income of companies off to the
Russian state budget.
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Quarrel over
Germany
third-party
access
(TPA)
in
Source: <https://www.nel-gastransport.de/en/our-network/>.
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OPAL from TAP for the period of 22 years from startup, while
applications for an exemption from TPA for NEL were rejected.42 As a
consequence, Gazprom could use 100% of the capacity of the OPAL
pipeline, while the NEL pipeline would be operated under the general
rules of the Third Energy Package, with the option for Gazprom to
contract capacities in open season. Following analysis of the antimonopoly legislation, the EC denied the request for OPAL TPA
exemption in 2012. This decision may prove to be Gazproms
undoing, since it would presumably limit Nord Streams output. On the
other hand, if the exemption is accepted, Gazprom will increase gas
flows through the Nord Stream and use the full capacity of OPAL to
supply Germany and neighboring countries, while reducing the transit
of gas through Ukraine. To solve the problem, the Bundesnetzagentur
suggested giving Gazprom 50% of the capacity of the OPAL pipeline;
the 50% of capacities remaining should have been sold on PRISMA
in March 2014. The EC should have validated the decision around
18 March 2014. However, due to the situation in Ukraine, this move
has been regularly postponed. 43 On the Russian side, all this has
reinforced the feeling that EU competition law aims to block
Gazproms activities in Europe and reduce Russian gas exports to
Europe. Between 7 and 10 September 2015, Gazprom sold gas to
Europe through auction (1.23 bcm of the 3.2 bcm of the gas
auctioned)44 at the St Petersburg International Mercantile Exchange
(SPIMEX) for deliveries to Europe (delivery point at Greifswald) an
experiment that seems to be a compromise with the EC (a sort of gas
release program). In Europe, spot prices are often seen as more
transparent and competitive. Nonetheless, this price maneuver is
above all a Russian attempt to attract buyers in a highly competitive
market. Once again, Gazprom has to adapt.
The questioning of the decision taken by the German Federal
Network Agency on the exemption of OPAL by the European
Commission is one illustration that over the years the EC has grown
in importance. The latter must inter alia ensure compliance with the
rules of competition policy structured on a dual basis, both legal and
economic. The legal basis consists of a set of rules for determining
legal and illegal practices of economic actors. The economic basis
consists of the protection of consumers and economic efficiency, and
not the respect of rules per se.
42
The entire press release published by the Bundesnetzagentur can be found at:
<www.bundesnetzagentur.de/SharedDocs/Downloads/EN/BNetzA/PressSection/Pre
ssReleases/2009/090225OPALPipelineId15650pdf.pdf;jsessionid=095188D7A1AD2
DC275D6385244130980?__blob=publicationFile&v=3>.
43
Opal Exemption Process Halted, Natural Gas Europe, 23 December 2014,
<www.naturalgaseurope.com/opal-exemption-process-suspended>.
44
<www.gazpromexport.ru/en/presscenter/press/1689/>.
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Conclusion
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